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Loomis Sayles Mid Cap Growth's Winning Streak

Phil Fine is coming off a winning year. His beloved Boston Red Sox captured the World Series for the second time in four years, and Loomis Sayles Mid Cap Growth, the fund he runs, hit a home run with a 38% return.

The $71 million fund (symbol LAGRX) practically tossed a shutout last year, beating its benchmark, the Russell Midcap Growth Index, by 29 percentage points. But Fine is proudest of his slugging percentage -- the ratio of big winners to big losers. He boasts that big winners -- those that advanced at least 20% last year -- exceed stocks that lost 20% or more by a ratio of 8 to 1 last year.

Fine builds his portfolio just like a general manager might build a ball team, with role players and risk takers. He finds most of his potential holdings in the Russell index, but also borrows from the picks of colleagues at Loomis Sayles who manage small-company funds.

He networks with company managements at conferences, too. And although Fine considers himself to be primarily a bottom-up stock picker (picking stocks issue by issue), he admits that he brings big-picture thinking to the process.

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"You need some informing view on the market, on the economy, if you're building a portfolio," he says. "Otherwise, you just have a grab bag of stocks."

Typically, Fine likes to put close to half of the fund's assets in classic growth stocks, companies that are expected to generate annual earnings growth of at least 20% over the next few years. He invests 10% to 20% of assets in "risk modifiers," stocks designed to dampen the fund's volatility. And he puts the remainder into what he calls "transformational growth" stories, companies that are experiencing changes that could lead to huge increases in growth.

Occasionally, a pick can shake up the lineup. About two years ago, Fine invested in Stericycle (SRCL) as a risk modifier. Since then, shares of the provider of medical-waste management services have doubled in value, essentially becoming a class-growth winner.

But it's those transformational companies that excite Fine most. He hit it big with Mosaic (MOS), a once-sleepy fertilizer producer whose shares soared 338% in 2007 and now sport a not-so-midcap market value of $41 billion. Mosaic, which has good exposure to the rapidly growing markets of China and Brazil, reported on January 9 that earnings for the quarter that ended November 30 rose nearly six-fold from the year-earlier period.

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Fine decided early in 2007 to look for companies that derived a lot of their earnings and revenues outside the U.S. "With hindsight, that was pretty much the only decision investors had to make last year," he says, "because that one decision certainly outweighed a multitude of sins."

The fund holds about 15% to 20% of its assets in foreign stocks, including emerging-markets names. Fine is bullish, for example, on providers of wireless telecommunications services in developing markets. The growing availability of wireless communications is "literally transforming people's lives," Fine says.

One of his top performers, Millicom (MICC) -- up 85% in 2007 -- is a Luxembourg-based company with interests in mobile-phone operations in 16 emerging-market nations. Fine sees huge growth potential in Africa and Asia, where wireless penetration levels are still relatively low.

Loomis Sayles Mid Cap Growth is not for the faint of heart. After gaining 199% in 1999, the fund plunged 79% during the 2000-02 bear market. (Over the past ten years through December 31, the fund returned 11% annualized, beating the average midcap growth fund by an average of three percentage points per year.)

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One lesson Fine learned from that debacle is that his fund needs to be better diversified. Last summer, for example, he cut the fund's weighting in telecom-services stocks from 10% to 5%. "They just got too big," he says, "both with respect to the size of the position and their capitalizations." He now caps each position at 5% of assets and starts to trim if it exceeds 4%.

The fund requires a $2,500 minimum initial investment for its retail class and charges 1.25% in annual expenses.